Walgreens' deal, downbeat guidance gets thumbs-down from Wall Street

A customer walks toward a Boston Walgreens entrance in May. Walgreens plans to keep its roots firmly planted in the United States, saying Wednesday, Aug. 6, 2014 it will no longer pursue an overseas reorganization that would have trimmed the amount of U.S. taxes it pays. (Steven Senne, AP)

Wall Street is delivering a thumbs down to Walgreens’ announcement of a $15.3 billion plan to complete its acquisition of Europe-based Alliance Boots and decision not to pursue potential major tax savings by shifting its headquarters overseas.

Shares of the nation’s largest drugstore chain were down more than 14.1% in afternoon trading at $59.35 after the Wednesday morning announcement.

The negative reaction came after Walgreens CEO Greg Wasson lowered the company’s earlier financial guidance, projecting revenue goals of $126 billion to $130 billion for fiscal year 2016, and adjusted earnings per share of $4.25 to $4.60 for that period.

During a conference call with Wall Street analysts, Wasson forecast that earnings before the deduction of interest, tax and amortization expenses would be “flat to a little up” through 2016.” Though he predicted “an opportunity to continue to drive growth beyond this reset,” his message appeared to be more downbeat than some investors expected.

Wasson partly blamed the gloomier outlook on a stepdown of reimbursements via the federal Medicare Part D program.

Addressing the issue of whether Illinois-based Walgreens should shift its headquarters overseas as part of the deal with Alliance Boots, Wasson said officials and expert advisers at both companies carefully analyzed the potential risks involved.

Such a shift is known as a corporate tax inversion. It’s being considered by at least a dozen U.S. companies, because reincorporating in lower-tax locations overseas is one way to significantly cut the annual cost from the 35% top business tax rate in the U.S.

But Wasson told analysts Walgreens’ assessment found the potential risks of a headquarters shift “included potentially putting the company in a significantly worse position than if we had not inverted at all, such as a protracted controversy with the IRS” and possible “litigation which could go on for three to 10 years” significantly complicating “everyday business planning.”

Walgreens also weighed the “harder to quantify” but equally significant risk of “consumer backlash and political ramifications , including the risk to our government book of business,” said Wasson, referring to the millions of dollars in revenue the company gets from federal Medicare and Medicaid programs.

In a separate statement issued with Wednesday’s announcement, Wasson said “the company also was mindful of the ongoing public reaction to a potential inversion and Walgreens’ unique role as an iconic American consumer retail company.”

“In the end, the parties could not arrive upon a structure that provided the level of confidence required by the (Walgreens) board to ensure that the transaction could withstand almost certain intense protracted IRS scrutiny,” Wasson told analysts.